SendGrid CEO: ‘Marketing Technology Has Been Vastly Over-Invested’

Advertising through email has long been viewed as nirvana for marketers, because, basically, the cost is so low to blast people with messages that it’s effectively free.

But it takes work, it turns out, to make it work, and so SendGrid of Boulder, Colorado, which makes money by transporting email messages for Uber, eBay (EBAY), and 40,000 paying customers since starting up in 2009. It is a cloud computing business, meaning, all of it is run by SendGrid, and customers plug into and use SendGrid via an “application programming interface,” or API, from the apps that the customer has built.

I spoke a short while ago with CEOE Sameer Dholakia and communications head David Friedman, on the occasion of the company today announcing it scored $33 million in a Series D investment, led by Bain Capital Ventures, which Dholakia says “we hope will lead us into an IPO,” without specifying a time frame.

In addition, prior investors Foundry Group and Bessemer Venture Partners, who led the B and C rounds, returned in this round.

The focus of the company with this new cash will be partly M&A in its newer line of business, email marketing, which is an offering growing at 75% a year or more.

Dholakia believes “M&A can be a great lever for us to pull,” given that “marketing technology has been dramatically over invested in,” he believes, leaving lots of smaller companies with a product or feature but not a real future.

The company now has $81 million in funding to date. I asked what the company’s post-money valuation is, and Dholakia declined to provide it, but said that the current valuation is “a significant step up from two years ago.”

Dholakia, who was previously the head of cloud software at Citrix Systems (CTXS), says SendGrid is on track to $100 million in revenue next year. “We are growing north of 30% now, and that will probably go to 40% next year,” he tells me.

To help me understand the business, Dholakia tells me “We are Twilio for email,” referring to publicly-traded Twilio (TWLO), which debuted this summer, and which provides backbone infrastructure for apps for the likes of Uber.

The company was founded by a trio of programmers who noticed that every time you build a Web site, you end up needing to send email to customers, which is a “very specific problem for developers of new software,” says Dholakia.

The service today sends over a billion emails a day on behalf of customers, which Dholakia notes is “two times the volume of Twitter ever day.” The company’s “touches” 1.6 billion unique email recipients each month, he notes.

"When you step out of an Uber, that receipt that shows up in your inbox is being delivered via SendGrid,” says Dholakia. “At Airbnb, that confirmation email is sent via our service. If you’re receiving notice from eBay or Spotify about a new music selection or vendor or product, that's all being delivered via SendGrid.” eBay alone uses SendGrid to dispatch a billion emails a month.

What about those smaller marketing companies, what’s wrong with them, I asked. Said Dholakia,

There are a lot of great companies out there, but many are more features than they are companies. The single most important metric as a business guy is the size of the addressable market, and the size of the business. If you can't see a clear path to greater than 100 million in revenue annually, it's probably just a product you’re making, or a feature, not a company. There are lots of companies out there that do things like being a big data company, or a vertical market-focused business. There are just so many of them out there, but if you take the thousands of marketing tech companies that have been invested in, and you remove everyone from the page that won't have 100 million in revenue or more next year, there aren’t that many left.

So, why would he be interested in buying them? "There are a lot of great teams working on problems that marketers face, but those teams are just not whole companies, even though what they do is valuable,” he says.

What they need is to be part of a platform that is part of an installed base […] We are naturally a platform. Many companies sit on top of SendGrid, as an email sending engine […] The size of our installed base means we can take some of those technologies and get them into the hands of customers where it has not been cost-effective for smaller marketing technology companies, simply because the problems they have been solving are smaller, and they can't reach customers who need to buy them.

Underlying the value of the company is the fact that, as communications director Friedman assures me, "email delivery is hard."

Email marketing can be valuable, he notes, as every dollar spent on email has been shown to produce a $38 return, according to data from industry group the Direct Marketing Association, in their most recent, January survey.

But not everyone can make sure that an email gets to a recipient, or stays out of the spam folder.

As Dholakia puts it, “When I joined two years ago, I just didn't appreciate how complex it is to have email land in an inbox, and not get dropped."

“It's tremendously complicated,” he says. "The fact that an ISP like Gmail or Yahoo! are facing a world where there are so many bad actors means that they actually drop 99% of email."

Most of the traffic going to these ISPs never makes it into the system, it gets dropped at edge of the network. Then there is some subset that gets into the network, and that goes to the spam folder. The ISPs like Google have, rightly, put up a lot of gates and checks and hurdles. If you don't understand all the best practices, you're likely not to be successful. We have over 300 employees that wake up every day thinking about email.

But, I asked, how does SendGrid know all this? Do they actually see my mailbox, as the recipient? “We partner with folks in email that give us better estimates on what makes it into the inbox,” explains Dholakia. “We get lots of supporting evidence. What we do know for certain is when an ISP accepts the message, and then it takes a little extra work to see if it actually got into your inbox."

SendGrid prices for its main email transport service based on volume of messages. For the email marketing bit, however, it adds a component that’s priced according to numbers of recipients. One reason for that, as Dholakia explains, is to discourage its customers from wantonly blasting lists of recipients. "We want them to not be blasting too many messages,” he says. "We want them to send relevant messaging."

Toward the end of our talk, Dholakia gave me his view on why cloud computing companies are popular to investors.

“SaaS has a highly predictable revenue stream,” he says, using the short-hand for cloud, “software-as-a-service,” or SaaS. “We can see, within a margin of 3% or 4%, what our revenue is likely to be in a year.

With the typical enterprise perpetual license software business, for every dollar you would get up front, for the right to use the software forever, you would get a maintenance component of revenue annually, on a recurring basis. In that model, when you start the next year, you are only guaranteed the 20% maintenance fee, because you’ve already received all the license revenue you’re going to get from your existing customers. But with SaaS, you are renting to the customer. So, while Oracle (ORCL) gets a lot of money up front, in SaaS, you have to earn that revenue month by month, but you end up with an exit run rate at the end of the year that you can point to, that gives you predictability for future revenue. Wall Street will always scrutinize the billings of a company, but every SaaS dollar of revenue will be much more highly valued because it is recurring.

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